Rugger Guy drills down into the Ibrox 2021 accounts

As advertised here is an expert analysis on the recently released accounts for Rangers International Football Club (RIFC).

As ever, I’m hugely indebted to my egg-chasing buddy for being so generous with his time.

Usual rules apply on these pieces, I’m merely the publisher see you on the other side of it:

 

Phil as per your request, I have carried out a review of the accounts of Rangers  International Football Club “RIFC” for the year ended 30 June 2021. Once again, this feels like Groundhog Day.

The results of RIFC are poor indeed. Since RIFC was founded in 2012, their cumulative operating losses have now exceeded £100m, following on from operating losses in the current year of £23.5m. Celtic plc in general have consistently shown operating losses but they have a sustainable business model in which player sales provides the financial resources to invest further.

RIFC have not as yet adopted this model and would be in liquidation once more if it was not for the sustained financial support of the directors and latterly other investors.

The financial outlook for RIFC is at best generously described as exceedingly challenged.

 

RIFC  has been impacted by a full year effect of covid, whereas last year it was for only three months. The gate receipts are down by £17m on the previous year, but match day costs are down by almost £9m, furlough has allowed staff costs to be subsidised and insurance claims of £1.25m coupled with government grants of £2.5m  has provided some mitigation, however, the trading performance in the absence of player sales is poor and losses of £23.5m is the worst yet, exceeding last year’s poor numbers of £15.3m  by over £8m.

 

As I have mentioned in the past, it is more interesting to start at the back of accounts and work forward. In the accounts of the current year, this has proved very interesting.

I will set out the report as follows:

 

Post balance sheet events, contingencies and  Audit opinion.

Financing and cash flow review.

Profit and loss account

Balance sheet

Conclusion.

 

POST BALANCE SHEET EVENTS.

RIFC  have made capital commitments of just over £1m  so this is not significant. However since the end of June, the share issue raised £4.5m, there has been further loans of £8.5m and yet there is still a need for £7.5m in order to reach the end of the financial year. As at the end of October, four months after the year-end, the company has a   requirement of over £20m to complete the full financial year. This is despite an aggressive review of cash management in which the company has changed merchant providers to improve terms on season ticket cash flows, supplying cash upfront instead of across the season. I will elaborate further on this later. RIFC   has utilised government schemes and assistance including payment deferrals for vat, employment taxes and job retention schemes for non-playing staff. Another interesting comment is the deferral of wage payments for high earning staff. No more details on this but this suggests a fairly desperate measure. Regarding contingent items, there is a provision of £2.75m in place, £400k was released back to the profit and loss account. The directors have not disclosed any more information on the Sports direct case as  they consider that this may prove seriously prejudicial. There is also a counterclaim against a former employee who is claiming against dismissal.

 

FINANCING AND CASHFLOW REVIEW.

I think it is important to highlight the extent to which directors and other investors have provided financial support to RIFC in the current financial year. This has come from the provision of loans, some of which is converted into equity at 20p per share, a value that is difficult to understand as the dilution alone points to a value of nearer 5p per share, notwithstanding cumulative operating losses of over £100m. Other related parties including Messrs McLeish, Letham, Gibson, Club 1872, McLeish, Forrest, Perron Investments, Taylor, McKinlay and Hosie have contributed £15.375 m in loans and these loans have been converted into equity at 20p per share. Messrs Letham and Gibson have provided further assistance of £1.5m  which has also been converted into equity. Messrs Mc leash and Taylor have also provided £2m of further loans.

On director loans, Messrs Bennett, Johnston and Wolhardt have provided further loans of £5.25m over a 7 year period commencing August 2021. This will attract a  6% accrued rate.

This loan compares with the previous chairman Mr King who provided a £5m loan on an 8% accrued interest rate. This was due to be repaid by the end of October but on the date that accounts were signed off, 27 October, this had not occurred. Aggregating the activity on all directors in assisting RIFC,  £7.4m loans were converted into equity. In addition, Mr Bennett also provided further working capital and was repaid £5.5m during the year in repayments for working capital assistance. Since RIFC  was formed some £85m gross from share issues have been raised before costs in order to allow the football club to avoid a  further administration event.

Although this is quite detailed information on individual investors and directors, the very obvious point is that without this very substantial support, RIFC would be in liquidation especially as the company have not had any credit line from any bank throughout the last 9 years.

On cash flow during the year.

Cash outflow in the year was £8m after the receipt of £21m  of loans during the year.

In the absence of substantial player sales in January or an extended European run, the director’s estimate of a further £7.5 injection looks exceedingly challenging. The auditors of course have once more drawn attention to emphasise of matter in arriving at their opinion. The responsibility lies with the directors in assessing the ability to trade on a going concern basis. Mr Bennett and Park have indicated that this will be provided by themselves, albeit this is on a non-binding basis.

 

PROFIT AND LOSS ACCOUNT.

Headline numbers are as follows:

Revenue was down from £59m to £47.7m down 19%

Operating expenses were down from £68.5m to £64m down 6.7%

Operating losses were increased from £15.9m to £23.5m up 48%.

Amortisation of player contracts were increased from £8.4m to £10.6m.

RIFC  spent £16.8m on new players, another large investment.

Profit on player sales increased from £0.7m to £1.7m

Losses before tax increased from £17.8m to £24.8m.

 

Delving into the numbers in detail. A revenue shortfall of £11.3m was largely down to gate receipts and hospitality impacts from Covid, this saw a reduction of £17.5m. Sponsorship was up by £1.6m and broadcasting revenues by £3m. Commercial and retail revenues of only £4.6m  show only a small increase of £0.7m. It should be noted that sales through sports direct companies are not included in turnover because RIFC does not control this business. Sales from RIFC retail outlets and direct sales are included. I suspect that the profits achieved through sports direct are quite small and insignificant. UEFA prize money and solidarity payments enjoyed a £2.2m increase to £11.2m. All in all, not a bad performance through Covid, enhanced by some success in the Europa competition. Matchday revenues and player sales together with any success in Europe will be the drivers in the current year.

Operating expenses show a mixed bag. Staff costs increased from £43.3m to £47.7m. RIFC refer to deferral of wage payments to players, however, this is a cash item, the full costs should be reflected here and deferral will be contained under trade creditors. First-team squad costs were £33.5m an increase of 13% last year. RIFC invested almost £17m in the first-team squad, and amortisation charges ( writing down of players contracts…a noncash item), increased from £8.4m to £10.6m, effectively showing the costs of investing further in players. Other operating charges which includes overheads and match day costs such as policing and stewards showed a fall from £23.2m to £14.4m  down almost £9m. Furloughing also helps in this regard.

In summarising on profit and loss account, the challenge for RIFC is that player sales are critical in order to get close to breaking even and also to try and reduce cashflow pressures as directors and other investors cannot continue to indefinitely subsidise the business losses. Insurance recoveries and government grant support of almost £4m will not continue post covid.

 

BALANCE SHEET.

 

On a positive front, the directors are on record to inform the auditors that they will continue to support the business for the immediate future on any further financing. However, this is non-binding hence the qualification by the auditors as an emphasis of matter as a going concern. Over £20m has already been committed either by share issues, loans given and promises of more funding since the year-end some four months ago.

The main features of the balance sheet are as follows.

Net assets of the company are £31.8m.

Intangible assets, (mainly the value of player contracts) are £37.4m a big increase on last year of £31.4m. Within this,  there are 8 players accounting for more than 80% of this value. The average contract term is 29 months. This is the big area where management will hope for some serious amounts being raised to remove financing pressures.

The current asset base has plummeted from £41m to £23.6m. RIFC has changed merchant providers and looks like they have got cash into the business a  lot earlier however cash balances of £3.3m are down from £11.1m at the same time last year.

The current liabilities have also fallen from £72.3m to £61.5m, however, £7.5m of this balance is attributable to loan reductions.(These were mainly converted to equity at 20p per share). Trade payables have dropped by £3.6m but you can see that the net working capital base of the company(identifier of cash flow requirement of the company), has now a deficiency of almost £38m. This deficiency was £31 m last year.

In note 20 of the accounts, RIFC is obliged to show a make-up of the asset base of the company split between financial assets (effectively working capital) and non-financial assets, (effectively the value of players contracts and physical assets such as Ibrox, training groups and fittings).

What  is quite sobering here is as follows:

Current assets £23.6m

Financial liabilities £29.6m

Trade and other payables £41.8m

So in summary  a deficiency of £47.8m

 

Fixed assets  £49.5m

Intangibles (mainly players contracts) £37.4m

Other payables (£7.2m)

So in summary a positive balance of £79.7m.

 

As you can see, it is self-evident that player sales are critical to reducing this deficit. Otherwise more shares and or loans will be needed to keep RIFC afloat.

 

 

CONCLUSION.

In the report above I thought it was important to emphasise the sheer scale of trading losses, over £100m since the new company was formed. It is also important to see that over £80m gross has been raised in issuing equity to pay for this. Also, loans continue to be given by directors and other investors to keep the lights on. Without player sales of significant value, RIFC will bleed cash.

Contingent liabilities could be very costly. The long-standing support of directors and other investors could be tested if the football team does not enjoy success on the pitch domestically and in Europe and if monies realised from player trading does not kick in on a significant basis. Assets that are sold on a distressed basis do not yield large amounts, especially when buyers can see the distressed nature of a business.

 

 

Well dear reader, did you get all of that?

As I stated in my farewell to Stevie G piece  I doubt that his successor will have huge funds to spend in January.

One other thought, my choice of featured image for this piece is a bit silly.

The idea of any entity operating out of Ibrox making a profit is rather fanciful.

Across the city, the financial landscape is very different.

Ange will have the ability to strengthen his squad in January.

However, Celtic should already be out of sight in terms of squad depth and strength.

Sadly, for those of us from a Hoops perspective, the suits in the Parkhead boardroom appear to have a back of the bus clingy attachment to the Old Firm business model.